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easyJet - On course for the full year

Nicholas Hyett | 22 January 2019 | A A A
easyJet - On course for the full year

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easyJet plc Ordinary 27 2/7p

Sell: 989.00 | Buy: 989.20 | Change 15.80 (1.62%)
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First quarter revenues rose 13.7% to £1.3bn, as both ticket sales and ancillary revenues delivered double digit growth. Costs per seat, excluding fuel, rose 1% - largely due to drone disruption at Gatwick.

easyJet expects full year results to be broadly in line with market expectations.

The shares were broadly flat in early trading.

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Our View

Running an airline can be tough. Fortunes are influenced by lots of factors outside companies' control - weather, the oil price and strikes to name just three. Most recently it's been drones hanging around Gatwick airport that have been causing easyJet a headache.

Even when macro conditions give carriers a tailwind, companies don't have it all their own way.

On the one hand, rising passenger numbers have seen revenues soar, with upselling ensuring ancillary revenues have taken off too. However, easyJet isn't the only one expanding. Capacity has flooded into the wider market, compressing margins.

Bankruptcies from some smaller players have dampened capacity growth, and mean that headwind has finally started to ease. That helped margins last year - although integrating assets acquired from Air Berlin is proving more difficult than the group had anticipated.

The policy of paying out 50% of profits as dividends means the benefits of more benign conditions should feed straight to shareholders pockets. easyJet currently offers a prospective yield of 5.1%.

However, both easyJet and Ryanair are eyeing new planes with more seats, which has potential to reignite the price war. If that happens, cost control will decide the winner, and easyJet's not the strongest performer on that front.

The tailwind from lower fuel costs is running out of puff, and is outside easyJet's control in any case. More important are the non-fuel operating costs the group can influence.

Scale benefits from larger, more efficient aircraft and growth at key airports is helping, but non-fuel costs per seat remain stubbornly high.

This shouldn't be a problem in the short-run, but it won't make for a robust business if times turn tough, and with uncertainty lingering over the short-term impact of a disorderly Brexit, there's clear potential for turbulence ahead.

Perhaps reflecting these concerns, the shares trade on 1.3 times book value. That's lower than the long-run average, which could interest value-seeking investors, but we'd still like to see meaningful progress on non-fuel costs before turning more positive.

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First Quarter Trading Update

Passenger numbers rose 15.1% to 21.6m in the quarter, with capacity increasing 18.2% (to 24.1m seats). As a result Load Factor, a measure of how full easyJet's planes are flying, fell 2.4 percentage points to 89.7%.

Increased passenger numbers drove a 12.2% increase in ticket revenue, to £1bn, and 19.9% increase in ancillary revenues, to £271m. However, a decline in Load Factor and weaker pricing, meant that total revenue per seat fell 4.2% to £53.63

Despite progress in the group's cost saving initiatives, total cost per seat at constant currency increased 2.2% to £55.55. Gatwick's drone disruption was part of the problem, adding £10m to costs.

Despite uncertainty relating to Brexit, bookings for the period after 29 March remain healthy

easyJet expects full year capacity to grow by 10%, although revenue per seat in the first half is expected to decline by mid-high single digits. That's partly down to changes in accounting standards, but also a more competitive market in Berlin. Costs per seat are expected to be broadly flat year-on-year.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.